How to save tax on Salary Income

The Income Tax Slab rates have been kept unchanged by the Finance Minister for the Financial Year 2018-19 (Assessment Year 2019-2020).

Tax planning is an important part of a financial plan and you can save taxes to a certain extent through proper tax planning. The Income Tax act also allows for certain Tax Deductions / Tax Exemptions which can be claimed to save tax. However, it is advised that do not invest in any tax tool just to save tax as it might not be beneficial to you in terms of saving and this might overweight savings on tax.

In this article, let us go through the best ways to save taxes and best tax saving options for FY 2018-19 / AY 2019-20. I hope you find this list useful and help in planning your taxes in advance.

How to save tax on Salary Income

Income Tax Deductions List FY 2018-19 / AY 2019-20 (Chapter VI-A deductions list)

Section 80C

The maximum tax exemption limit under Section 80C has been retained at Rs 1.5 Lakh only. The various investment avenues or expenses that can be claimed as tax deductions under section 80c are  listed as below;

PPF (Public Provident Fund)

EPF (Employees’ Provident Fund)

Five year Bank or Post office Tax Saving Deposits

NSC (National Savings Certificates)

ELSS Mutual Funds (Equity Linked Saving Schemes)

Kid’s Tuition Fees

SCSS (Post office Senior Citizen Savings Scheme)

Principal repayment of Home Loan

NPS (National Pension System)

Life Insurance Premium

Sukanya Samriddhi Account Deposit Scheme

Section 80CCC

Contribution to annuity plan of LIC (Life Insurance Corporation of India) or any other Life Insurance Company for receiving a pension from the fund is considered for tax benefit. The maximum allowable Tax deduction under this section is Rs 1.5 Lakh.

Section 80CCD

An employee can contribute to Government notified Pension Schemes (like National Pension Scheme – NPS). The contributions can be up to 10% of the salary (salaried individuals) and Rs 50,000 additional tax benefit u/s 80CCD (1b) which will be over and above of Rs. 1,50,000.

To claim this deduction, the employee has to contribute to Govt recognized Pension schemes like NPS. The 10% of the salary limit is applicable for salaried individuals only and Gross income is applicable for non-salaried. The definition of Salary is only ‘Dearness Allowance.’ If your employer also contributes to Pension Scheme, the whole contribution amount (10% of salary) can be claimed as tax deduction under Section 80CCD (2).

Kindly note that the Total Deduction under section 80C, 80CCC and 80CCD(1) together cannot exceed Rs 1,50,000 for the financial year 2018-19. The additional tax deduction of Rs 50,000 u/s 80CCD (1b) is over and above this Rs 1.5 Lakh limit.

Contributions to ‘Atal Pension Yojana‘ are eligible for Tax Deduction under section 80CCD.

Section 80D

*As amended by Finance Act 2018

This Section provides for a deduction of Rs. 25,000 in respect of premium paid towards a health insurance policy for the Assessee or his family (spouse and dependent children) or any contribution made to the Central Government Health Scheme in aggregate and a further deduction of Rs. 25000 is allowed of premium paid in respect of health insurance policy for parents.

Health Insurance & Senior Citizens: An increased deduction of Rs. 50000 is allowed in case any of the persons mentioned above are senior citizens (i.e. of age 60 years or above).

Single premium Health Insurance policy / Multi-year Mediclaim policy:

In case of single premium health insurance policies having a cover of more than one year, it is proposed that the deduction shall be allowed on the proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit.

Preventive health checkup (Medical checkups) expenses to the extent of Rs 5,000/- per family can be claimed as tax deductions. Remember, this is not over and above the individual limits as explained above. (Family includes: Self, spouse, parents and dependent children).

Section 80DD

You can claim up to Rs 75,000 for spending on medical treatments of your dependents (spouse, parents, kids or siblings) who suffer from 40% disability. The tax deduction limit of up to Rs 1.25 lakh in case of severe disability can be availed.

To claim this deduction, you have to submit Form no 10-IA.

Section 80DDB

An individual (less than 60 years of age) can claim up to Rs 40,000 for the treatment of specified critical ailments. This can also be claimed on behalf of the dependents. The tax deduction limit under this section for Senior Citizens and very Senior Citizens (above 80 years) has been revised to Rs 1,00,000.

To claim Tax deductions under Section 80DDB, it is mandatory for an individual to obtain ‘Doctor Certificate’ or ‘Prescription’ from a specialist working in a Govt or Private hospital.

Section 80CCG

Tax Benefits of Rajiv Gandhi Equity Savings Scheme (RGESS) under section 80CCG has been withdrawn. However, if an investor has invested in the RGESS scheme in FY 2016-17 (AY 2017-18), they can claim deduction under this Section until AY 2019-20.

Section 24 (B) (Loss under the head Income from House Property)

From FY 2017-18, the Tax benefit on loan repayment of the second house is restricted to Rs 2 lakh per annum only (even if you have multiple houses the limit is still going to be Rs 2 Lakh only and the ceiling limit is not per house property).

The unclaimed loss if any will be carried forward to be set off against house property income of subsequent 8 years. In most of the cases, this can be treated as ‘dead loss‘.

I believe that this is a major blow to the investors who have bought multiple houses on the home loan(s) with an intention to save taxes alone.

Until FY 2016-17, interest paid on your housing loan is eligible for the following tax benefits ;

Municipal taxes paid, 30% of the net annual income (standard deduction) and interest paid on the loan taken for that house are allowed as deductions.

After these deductions, your rental income can be NIL or NEGATIVE and is called ‘loss from house property’ in the latter case.

Such loss is currently allowed to be set off against other heads of income like Income from Salary or Business etc. which helps you to lower your tax liability substantially.

 Section 80E

If you take any loan for higher studies (after completing Senior Secondary Exam), tax deduction can be claimed under Section 80E for interest that you pay towards your Education Loan. This loan should have been taken for higher education for you, your spouse or your children or for a student for whom you are a legal guardian. Principal Repayment on educational loan cannot be claimed as tax deduction.

There is no limit on the amount of interest you can claim a deduction under section 80E. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier.

Section 80EE

This was a new proposal which had been made in Budget 2016-17. The same will be continued in FY 2018-19 / AY 2019-20 too. First time Home Buyers can claim an additional Tax deduction of up to Rs 50,000 on home loan interest payments u/s 80EE. The below criteria has to be met for claiming tax deduction under section 80EE.

The home loan should have been sanctioned during/after FY 2016-17.

Loan amount should be less than Rs 35 Lakh.

The value of the house should not be more than Rs 50 Lakh &

The home buyer should not have any other existing residential house in his name.

Section 80G

Contributions made to certain relief funds and charitable institutions can be claimed as a deduction under Section 80G of the Income Tax Act. This deduction can only be claimed when the contribution has been made via cheque or draft or in cash. In-kind contributions such as food material, clothes, medicines etc do not qualify for deduction under section 80G.

The donations made to any Political party can be claimed under section 80GGC.

W.e.f FY 2017-18, the limit of deduction under section 80G / 80GGC for donations made in cash is reduced from current Rs 10,000 to Rs 2,000 only.

If you want to donate some fund to a political party of your choice, you can do so in cash of up to Rs 2,000. Beyond that, you can not donate the amount in cash mode. It can be done through Electoral Bonds.

Section 80GG

The Tax Deduction amount under 80GG is Rs 60,000 per annum. Section 80GG is applicable for all those individuals who do not own a residential house & do not receive HRA (House Rent Allowance).

The extent of tax deduction will be limited to the lower amount of the following;

Rent paid minus 10 percent the adjusted total income.

Rs 5,000 per month.

25 % of the total income.

(If you are claiming HRA (House Rent Allowance) of more than Rs 50,000 per month (or) paying rent which is more than Rs 50,000 then the tenant has to deduct TDS @ 5%. It has been proposed that the tax could be deducted at the time of credit of rent for the last month of the tax year or last month of tenancy, as applicable.)

Rebate under Section 87A

The tax rebate of Rs 2,500 for individuals with income of up to Rs 3.5 Lakh has been proposed in Budget 2017-18 and the same will be continued for FY 2018-19 / AY 2019-20 as well.

Only Individual Assesses earning net income up to Rs 3.5 lakhs are eligible to enjoy tax rebate u/s 87A.

For Example: Suppose your yearly pay comes to Rs 4,50,000 and you claim Rs 1,50,000 u/s 80C. The total net income in your case comes to Rs 3,00,000 which makes you eligible to claim tax rebate of Rs 2,500.

The amount of tax rebate u/s 87A is restricted to the maximum of Rs 2,500. In case the computed tax payable is less than Rs 2,500, say Rs 2,000 the tax rebate shall be limited to that lower amount i.e. Rs 2,000 only.

The Tax Assesse is first required to add all incomes i.e. salary, house income, capital gains, business or profession income and income from other sources and then deduct the eligible tax deduction amounts u/s 80C to 80U and under section 24(b) (Home Loan Interest) to come up with the net taxable income.

If the above net taxable income happens to be less than Rs 3.5 lakhs then the tax rebate of Rs 2,500 comes into the picture and should be deducted from the calculated total income tax payable.

Section 80 TTA & new Section 80TTB

For Senior Citizens, the Interest income earned on Fixed Deposits & Recurring Deposits (Banks / Post office schemes) will be exempt till Rs 50,000 (FY 2017-18 limit is up to Rs 10,000). This deduction can be claimed under new Section 80TTB. However, no deductions under existing 80TTA can be claimed if 80TTB tax benefit has been claimed (the limit for FY 2017-18 & FY 2018-19 u/s 80TTA is Rs 10,000).

Section 80TTA of Income Tax Act offers deductions on interest income earned from savings bank deposit of up to Rs 10,000. From FY 2018-19, this benefit will not be available for late Income Tax filers.

Interest income from deposits held with companies will not benefit under this section. This means, senior citizens will not get this benefit for interest income from corporate fixed deposits us/ 80TTB.

Section 80U

This is similar to Section 80DD. The tax deduction is allowed for the tax assessee who is physically and mentally challenged.

Standard Deduction of Rs 40,000 in-lieu of Medical Allowance – Budget 2018

For FY 2017–18, the medical allowance of up to Rs 15,000 is exempted income from your Gross salary. To claim this, you need to submit medical bills to your employer and get the allowance benefit. The medical reimbursement allowance is exempted under Section 10 of the Income Tax Act.

If you have submitted medical bills (to your employer) towards medical allowance and also paid the premium towards your mediclaim (health insurance) then both of them will be listed in your Form-16 under different sections

Mediclaim section 80D form 16

From FY 2018-19, a standard deduction of Rs 40,000 in lieu of travel, medical expense reimbursement and other allowances has been proposed for salaried employees and pensioners. To claim this standard deduction, there is no need to submit medical bills to your employer.

As per this new proposal, irrespective of the amount of taxable salary the assessee will be entitled to get a deduction of Rs.40,000 or taxable salary, whichever is less. Thus suppose if a person has worked for few days (or) months and his salary was just Rs 40,000 for a previous year, then he will be entitled to deduction equal to salary being the same amount. If his salary is less, say Rs 30,000 the deduction shall be restricted to Rs 30,000. If salary exceeds an amount of Rs 40,000, the deduction shall be restricted to Rs 40,000.

Section 10 Exemptions

Section 10(5) – Leave Travel Concession

An employee can claim exemption under section 10(5) in respect of Leave Travel Concession. Exemption under section 10(5) is available to all employees (i.e. Indian as well as foreign citizens). Exemption is available in respect of value of any travel concession or assistance received or due to the employee from his employer (including former employer) for himself and his family members in connection with his proceeding on leave to any place in India.

Section 10(7) of the Income Tax Act – Perquisites and Allowances paid by Government to its Employees serving outside India

All the perquisites and allowances paid by the Government to its employees for services rendered outside India are exempt from tax.This exemption is allowed only to such employees of the Government who are citizens of India.

Section 10(10CC) – Tax on Perquisites paid by employer

Sometimes for non-monetary perquisites employer pay tax on behalf of employee in that case the tax so paid by the employer is treated as exempt in the hands of the employee.

Section 10(35) – Income from units of UTI and other mutual funds

All the below following are exempt:

– Dividend income covered by section -115-O

– Income in respect of units of a mutual fund

– Income received by the unit holder of UTI

– Income earned units of a specified company

Note: Under section 115-O and section 115R, the person paying the dividends on share or income on units will have to pay distribution tax on dividend/income distributed.

It should be noted that under this clause, Income on the transfer of units is not exempt.

Section 10(23D) – Tax free mutual funds

Any income of following mutual funds (subject to provisions of sections 115R to 115T) is exempt from tax:

A mutual fund registered under the Securities and Exchange Board of India Act or regulation made thereunder.

A mutual fund set-up by a public sector bank, or a public financial institution or authorised by RBI (subject to conditions notified by the Central Government).

Section 10(23DA) – Exemption of income from securitization trust

Any person who is an investor of securitization trust receives any income from such a trust, by way of distributed income shall be exempt.

Section 10(36) – Income from sale of shares in certain cases

The transfer of a long-term capital asset for arising any income, when a company purchases eligible equity shares held for a period of 12 months or more shall be exempt.

Section 10(37) – Capital Gain on compulsory acquisition of urban Agricultural Land

Any income chargeable under the head “Capital Gain” arising from the transfer of agriculture land shall be exempt.

Section 10(38) of income tax act – Long Term Capital Gain on transfer of shares and securities covered under Security Transaction Tax (STT)

When the transfer of securities are not chargeable to tax to any individual then long-term capital arises, following conditions should be satisfied:

At the time of transfer, transactions must be liable to securities transactions tax.

At the time of transfer of assets, it should be equity shares or a unit of a business trust or units of an equity oriented mutual fund.

Assets must be a long-term capital asset. Transfer must be taken place on or after October 1, 2004.

Section 10(13a) – HRA Exemption

An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following :

– House Rent Allowance actually received by the assessee

– Excess of rent paid less 10% of salary* due to him

– An amount equal to 50% of salary due to an assessee

Note: If the rent is more then 100,000/- individual need to compulsory submit PAN of the landlord under Circular No. 08 /2013 dated 10th October 2013.

*Salary – Basic + DA (if part of retirement benefit) + Turnover based Commission

Entertainment Allowance

This allowance is first included in gross salary under allowances and then the deduction is allowed.In the case of government employees, least of the following is exempt:

– Rs 5,000;

– 20% of salary; or

– entertainment allowance actually received.

Leave Travel Concession [Section 10(5)]

For a government employee, leave encashment upon retirement or leaving the job is tax-free under Section 10. For a non-government employee, it is exempt up to least of the following:

– Earned leave (No. of months) multiplied by Average monthly salary

– 10 multiplied by Average monthly salary

– Rs. 3, 00,000

– Actual leave encashment received

Also, it is requested to understand the tax treatment of the selected investment products across the different investment stages (i.e., investment, accrual & withdrawal) and then invest

I believe that the above list is useful for your Tax Planning purpose. Do make a note that this article is applicable for A/Y. 2019-2020 and F/Y 2018-2019.

[Disclaimer : This article is as per Finance Act 2018 and relevant for Assessment Year 2019-2020]

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